October 10, 2000 Hole in tech sector now officially big enough to drive a P/E through

In what is becoming a pattern here in the emerging Pre-announcement Chronicles, we had yet another one as we were finishing the Rap three minutes after the market closed, this time from none other than Lucent (LU). What the company had to say is going to send shudders through tomorrow's tape -- a large earnings miss, lowered guidance for 2001 and down revenue from its optical networking systems. They also cited credit concerns in the emerging service provider market, i.e., the CLECs.

All told, that's a very serious and wide-ranging group of problems Lucent brought up, and it will definitely impact a lot of areas tomorrow. Lucent now joins a long list of pre-announcers on the bell, including Intel (INTC), Dell (DELL), Apple (APPL) and Lexmark (LXK), to name some of the biggest. With Lucent, what I want to know is, when they miss this badly, why did it take 10 days after the quarter ended to hear about it? What did they know and when did they know it? And the follow-up question is: Hey, Lou, how about you?

Onward, if not upward. . . Overnight, things were pretty quiet, but just before the opening we had a stringer full of dead fish lower their ratings on Xilinx (XLNX) and Altera (ALTR), two companies that make PLDs (that stands for programmable logic devices, for those of you keeping score at home). The result was a huge problem in the chip arena -- more on that later.

The falling ratings also brought a wave of selling on the opening in the tech sector, and the Sox was pounded initially. As everyone should know by now, that meant buy the S&P. So as Sox, bank stocks and financials were pounded, the S&P was bought. In the early going the dichotomy was pretty stark -- a hole blown wide open in the tape in the tech sector, yet the major averages looked more or less OK.

After the first few hours, it was literally more of the same. About three hours into the melee the Sox was down about 12 percent, the bank stock index was down 3 percent and the Dow was up 27 points, if you can believe that. At the same time, the S&P was down just fractionally and the Nasdaq was down about a 1 < percent.

The X factor. . . Why Xilinx mattered this morning was because its products go predominantly into networking equipment, which has thus far been perceived as a sacrosanct area in the technology world. I heard rumors a while back that Xilinx had received cancellations; now one can be certain they were true. Lastly, the fact that three dead fish came out and downgraded these stocks today tells you they got some guidance from management, so one can be certain that this problem is not going to go away in 15 minutes, nor is it company-specific.

Having said all that, an attempt was made early today to push up the high-flying stocks, even as some of the more mundane chip stocks were being bombed. However, that didn't work because a few people came to their senses and connected some dots. Pretty soon, in the first couple hours, the high-flying chip stocks got hammered as well -- PMC-Sierra (PMCS) down 10 percent, Broadcom (BRCM) down 5 percent, Applied Micro Circuits (AMCC) down 10 percent, etc.

All told, there was a tremendous amount of motion in the first few hours, and when one stared at the prices of the heretofore tech leaders compared to the indices, it was one of the biggest disconnects we've seen -- and we've certainly seen a few. In the immortal words of Dick Nixon, "Let me be clear about that." The hole that blew open in the tech story today was huge and, as I have been saying, things are only going to be getting worse.

Over the course of the day, there were several attempts at rallies, but none of them could catch any legs. We continued to work our way lower and closed essentially on the lows. If you look at the Dow and the S&P, the damage was much less pronounced than in the over-the-counter market or some of the subgroups that got hammered. At the end of the day, the Sox was down 10 percent, the bank stocks were down 3 percent, the Nasdaq was down 4 percent and the Nasdaq 100 was down slightly more than 4 percent.

On borrowed time. . . Once the Lucent news hit the tape, the futures (which trade until a quarter after the hour) got hit some more, the Nasdaq 100 dropped an additional 2 percent and the S&P dropped another = percent, setting the stage for an ugly day tomorrow. How Wednesday goes will depend somewhat on the results out of Yahoo (YHOO), Motorola (MOT) and General Electric (GE) -- to pick three important ones -- which we'll have by the time the market opens.

Rather than describe what got hit, it's safe to say that all the heretofore high-flying stocks in technology and the financial arena got clubbed today, with the exception of some of the more gaudily valued stocks in the optical area, which were rallying. I suspect that will change by tomorrow.

Like yesterday, a lot of trap doors sprung open today and stocks fell through. It felt like buyers were trying to reach a bottom all day long, and I think a decline with this kind of damage can only end in a huge cleanout where we see real panic selling -- something we haven't seen so far. Things have been fairly orderly and folks have been fairly complacent so far, but that will change at some point.

Away from stocks, fixed income was up a freckle and the dollar was down against the euro and the yen. Is this the beginning of a trend? We shall have to see. Even the precious metals were up a touch. Oil was up $1.29 to more than $33. On the front page of today's business section in The New York Times there was an article called "Tap the Oil Reserve, and Entrepreneurship Flows." I encourage folks to read the article, which is a more in-depth look at the story we mentioned yesterday regarding what a joke tapping the SPR has become.

We might want to leave some behind after all. . . Speaking of oil, Fed "dovenor" McTeer gave a speech today in which it appears he is recognizing that energy prices may increase the risk of accelerating inflation. He said that energy prices have been pushed up as much by increased demand as by limits on supply. No kidding, Robert. Way to go -- you finally recognized the obvious. Is that because we know the CPI and PPI are going to be ugly this month because they were so fiddled last month? In any case, when someone who has been as clueless as this guy starts to wake up and smell the coffee, I guess we have to start paying attention to how it might go in reverse, although I do think that's too soon and being a little bit clever.

I think Justin Mamis in his morning piece described the public's complacency best when he said, "The public that arrived [in the stock market] after Kuwait has never believed the market could go down at all, let alone down as violently as last spring and again now, so they must of necessity hope that it isn't going to last, and join the analysts, strategists, and the TV 'stars' in looking for a bear market bottom before they have even accepted that it is a bear market."

And that is exactly the conundrum that erstwhile bulls and bubbleonians now face. They think the market is done going down before they realize it is actually going down. This points up the fatal flaw in one the mania's maxims, which is "Be fully invested and buy all dips." At some point that can't work, because you can't buy the dips if you are fully invested, especially when you don't have an infinite amount of buying power. And naturally, after you have had numerous opportunities to buy the dip, by definition stocks have stopped going up -- which is where we find ourselves.

In other news, last night Xerox (XRX) announced it was cutting its dividend by 75 percent. What's stunning about this is back in 1982 when this bull market began, Xerox was struggling to maintain the dividend. I remember the stock was about $32 pre-split (about $5 split-adjusted) and the yield was close to 10 percent. I remember being quite bullish on it at the time and here we are 18 years later and the stock has barely doubled. Now they've had to cut the dividend they struggled so hard to keep 18 years ago. It just goes to show that there are plenty of problems hiding beneath the surface in some of these companies.

Dead fish futures. . . I think what's happened recently is finally going to sober up some of the dead fish and cause them to make an attempt and try to do their job and try to get out in front of problems and start being analysts again instead of cheerleaders. Most of these people won't be able to, but some of them will. The fair disclosure rules that take effect in a couple of weeks are also going to place a tremendous premium on research. No more will the companies simply be able to guide their favorite analysts who can then guide their favorite customers (read mutual funds) to the proper conclusions.

Research and anticipating (versus reacting) is going to be at a premium, as it usually is in the investment business, with the exception of the recent mania and a couple of other crazy periods in the past. The stock market is a discounting mechanism and may begin acting more like one prospectively. In the recent past, to paraphrase Warren Buffett, it has more resembled a voting machine rather than a weighing machine. In my opinion, the pendulum is beginning to swing in the other direction.

Dead Fish Chronicles. . . A reader submitted the following last week which originated at contraryinvestor.com:

In a perceptual about face, the public is learning to distrust analyst commentary, recommendations and forecasts after being burned in Net issues, the DRAM players, semi-equipment stocks, and now broader big tech in general. In the end, Wall Street really only has itself to blame. Wall Street is in the business of selling financial products, so it is really caught in a Catch-22. After all, when was the last time you visited a used car lot and had the salesperson tell you there simply weren't any good buys on the lot at the moment? Answer: Never.

Invective perspective. . . For those readers who may have already come across this batch of posts, please feel free to enjoy them again. (They originated on Yahoo's WGAT thread during a three-day period last February.) For those who haven't, be prepared to be amused. Just imagine Woody Allen as a day trader.

http://www.siliconinvestor.com/insight/contrarian/

-- Carl Jenkins (Somewherepress@aol.com), October 10, 2000

Answers

This Lucent thing is a big big blow. We're talking here about a $10 billion QUARTER (July-Sept.), about a company whose stock is believed to be the most widely held in America.

I'd hate to be a Day Trader tomorrow.

-- JackW (jpayne@webtv.net), October 11, 2000.

The big shocker to me was the after-hours announcement from PacifiCare, biggest HMO in the country. They were expected to earn $1.90 a share, and warned that they, instead, would come in with a breakeven to slight loss situation.

It looks like the Clinton-Gore war on HMO's is paying off for them.

-- Wellesley (wellesley@freeport.net), October 11, 2000.

Well, at least Motorola and Yahoo didn't disappoint. They hit their targets.

-- Billiver (billiver@aol.com), October 11, 2000.

I like Dead Fish Chronicles. That's a good title for this story.

-- Uncle Fred (dogboy45@bigfoot.com), October 11, 2000.